PETALING JAYA: AmBank Research forecasts a better market performance next year amid low expectations, with a projected year-end FBM KLCI target of 1,670 points, largely to reflect the less active participation of both foreign and local institutional investors in the market.
In a note today, AmResearch said the catalysts for a KLCI re-rating in 2020 could potentially come from investors’ increased appetite for risk assets, particularly emerging market (EM), including Malaysian, equities.
However, this will be conditional upon the US Federal Reserve not tightening monetary policy, the sustained high equity valuations in developed markets, an easing of trade tensions between the US and China, and a continued moderation in the risk of a global economic recession.
A change in Malaysia’s perceived country risk premium following significant political events and a play on the ringgit would also act as market catalysts next year, said AmResearch.
It should be noted that a play on the ringgit will be driven by events such as the FTSE Russell retaining Malaysia in the World Government Bond Index during its next half-yearly review in March 2020, a steep rise in crude oil prices, and an end to the easing cycle with only another 25 basis point cut in the Overnight Policy Rate by Bank Negara Malaysia in 2020.
“A new equity inflow cycle to EMs has already manifested itself in the latest weekly global fund flow numbers. EM equities have already attracted net inflows since end-Oct 2019.
“We believe it will eventually show up on Malaysian shores, given Malaysia’s weighting in the MSCI Emerging Markets Index, which we believe, while small at 1.9%, is still relevant,” it said.
Malaysia’s 1.9% weighting is largely made up of Public Bank Bhd (0.25%), Tenaga Nasional Bhd (0.17%), Maybank (0.13%), CIMB Group Holdings Bhd (0.10%) and Petronas Chemicals Group Bhd (0.07%).
Meanwhile, in terms of the KLCI’s valuation, AmResearch said following a major under-performance in 2019 against both EM and developed markets (DM), the benchmark index is now trading in line with DM in terms of price-to-earnings, but still at a substantial premium over EM.
“However, the premium may be justified (at least partially) by virtue of certain local institutional market participants occasionally stepping in to provide liquidity in times of extreme market volatility,” said AmResearch.
The research house said it was overweight on the banking, oil & gas, consumer and utilities sectors.
Its top stock picks are: Malayan Banking Bhd (Maybank), Tenaga Nasional Bhd, RHB Bank Bhd, Westports Holdings Bhd, Kossan Rubber Industries Bhd, Serba Dinamik Holdings Bhd, DRB-Hicom Bhd, MMC Corp Bhd, MBM Resources Bhd and Guan Chong Bhd.
